Suppose the Fed raises the federal funds rate. Put the following changes in order in which they occur, starting with the changes that take place almost immediately and ending with the changes that may occur up to two years afterwards: i. Short-term interest rates rise.
Ii. Long-term interest real interest rate rises.
Iii. Aggregate demand decreases.
Iv. Inflation rate decreases.

Question

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When the Fed raises the federal funds rate, short-term interest rates rise almost immediately. This is followed by an increase in long-term real interest rates. As borrowing costs increase, aggregate demand decreases. Finally, the inflation rate decreases as a result of reduced demand and economic activity.

Suppose the Fed Raises the Federal Funds Rate